May 8, 2014 6:15 pm

Shah arrested in India’s NSEL probe

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The chairman of Financial Technologies, the group at the centre of an alleged fraud at India’s National Spot Exchange Limited (NSEL), has been arrested as authorities investigate the collapse of one of the country’s largest commodities bourses.

Jignesh Shah has been under police investigation since August after NSEL, owned by Financial Technologies, abruptly suspended trade in most of its commodities contracts on July 31.

The exchange defaulted on obligations to market participants because it did not have enough collateral.

FTIL’s suspension was initially seen as a cautionary tale of lax oversight in India’s often opaque financial markets, as it emerged that clients of the brokers had been allowed to take out unregulated longer-term forward contracts, rather than the spot, physical contracts that the bourse was established to handle.

As a result, investors began to question whether there was actual delivery of the commodities that were being traded and the Forward Markets Commission, the main Indian commodities regulator, is investigating an alleged an Rs55bn fraud ($918m).

Investors and brokers filed complaints with Mumbai police, claiming that underlying goods didn’t exist and that warehouse receipts were fake.

Arun Dalmia, secretary of NSEL Investor Forum, an investor pressure group that has awaited Shah’s arrest, said: “It is like an NBFC [non-banking financial company] and given the colour of a commodities exchange to fool the investors.”

“On the 16th, the government is going to be changed – and that is why there is pressure mounting on all these agencies to solve these cases.”

Financial Technologies shares fell 5 per cent to 276.30 rupees when trading stopped at Rs276.30, having lost 67 per cent in the past year. Meanwhile, MCX, another exchange in which Financial Technologies owns a 25 per cent stake, fell 6.7 per cent to Rs497.15.

Financial Technologies has been ordered to divest its MCX stake after the Securities and Exchange Board of India said the group failed its “fit and proper” test to hold equity in an exchange.

“For the company, the whole issue is it now needs to reconstitute its board, so they’ll need a new chairman, new members will need to be brought in,” says Amit Tandon, director of Institutional Investor Advisory Services, a shareholder advocacy group.

“The view is that Jignesh Shah and even FTIL needs to be out and then you substitute them with another shareholder who meets the fit and proper guidelines.”

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